<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For the quarterly period ended March 31, 2000.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______ to _____
Commission File No. 0-3132
SUNBASE ASIA, INC.
(Exact name of Registrant as specified in its charter)
Nevada 94-1612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19/F, First Pacific Bank Centre
51-57 Gloucester Road
Wanchai, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2865-1511
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _____ No X
-------
As of May 24, 2000, the Company had 14,118,751 shares of common stock issued
and outstanding.
1
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SUNBASE ASIA, INC. AND SUBSIDIARIES
-----------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX
PART I: FINANCIAL INFORMATION
Item 1 -- Financial statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1999 and March 31, 2000 3-5
Consolidated Condensed Statements of Income (unaudited)
- Three months ended March 31, 1999 and 2000 6
Consolidated Condensed Statements of Cash Flows (unaudited)
- Three months ended March 31, 1999 and 2000 7-8
Notes to Consolidated Condensed Financial Statements
(unaudited)
- Three months ended March 31, 1999 and 2000 9-21
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 22-33
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk 34-35
PART II: OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K 36
SIGNATURES 37
EXHIBIT 11 Computation of Earnings Per Common Share
EXHIBIT 27 Financial Data Schedule
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
--------------------
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1999 AND MARCH 31, 2000
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/99 3/31/00
Notes RMB US$ RMB US$
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank balances 8,420 1,018 4,095 495
Accounts receivable, net 380,986 46,040 435,573 52,637
Notes receivable 2,148 259 220 27
Inventories, net 4 448,121 54,153 424,394 51,286
Other receivables 25,848 3,123 27,918 3,374
Due from related companies 192,589 23,273 182,178 22,016
--------- --------- --------- ---------
Total current assets 1,058,112 127,866 1,074,378 129,835
Fixed assets 486,665 58,811 470,550 56,864
Net assets of discontinued operations 5 26,193 3,165 27,269 3,295
--------- --------- --------- ---------
Total assets 1,570,970 189,842 1,572,197 189,994
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 575,652 69,565 576,652 69,686
Installment Loan, current portion 115,797 13,993 115,797 13,993
Interest payable on Installment Loan 4,102 496 5,414 654
Long term bank loans, current portion 168,974 20,420 168,974 20,420
Accounts payable 138,840 16,778 139,555 16,865
Accrued liabilities and other payables 178,916 21,621 195,835 23,666
Short term obligations under capital leases 22,774 2,752 17,080 2,064
Secured promissory note 6 24,825 3,000 24,825 3,000
Income tax payable 40,703 4,918 62,060 7,500
Taxes other than income 75,140 9,081 73,294 8,857
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Due to related companies 83,762 10,123 83,762 10,123
--------- --------- --------- ---------
Total current liabilities 1,429,485 172,747 1,463,248 176,828
Long term obligations under capital leases 24,777 2,994 24,777 2,994
Minority interests 97,596 11,794 82,880 10,016
--------- --------- --------- ---------
1,551,858 187,535 1,570,905 189,838
</TABLE>
Continued/...
The accompanying notes form an integral part of these consolidated condensed
financial statements.
4
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/99 3/31/00
------------------------------ -------------------------
RMB US$ RMB US$
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shareholders' equity:
Common Stock, par value US$ 0.001 each,
50,000,000 shares authorized;
14,118,751 (1999: 14,118,751) shares
issued, and fully paid-up 119 14 119 14
Preferred Stock, par value US$ 0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock - Series A;
36 shares issued and outstanding 44,533 5,381 44,533 5,381
Contributed surplus 217,953 26,338 217,953 26,338
Reserves 28,052 3,389 28,052 3,389
Accumulated other comprehensive income 1,377 166 1,377 166
Retained earnings/(accumulated losses) (272,922) (32,981) (290,742) (35,132)
----------- --------- ---------- ----------
Total shareholders' equity 19,112 2,307 1,292 156
---------- --------- ---------- ----------
Total liabilities and shareholders' equity 1,570,970 189,842 1,572,197 189,994
========== ========= ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
5
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1999 2000 2000
Notes RMB US$ RMB US$
------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Net sales to
- Third parties 106,852 12,873 140,058 16,925
- Related parties 6,488 782 8,440 1,020
-------- --------- --------- --------
113,340 13,655 148,498 17,945
Cost of sales (108,921) (13,123) (147,420) (17,813)
-------- --------- --------- --------
Gross profit 4,419 532 1,078 132
Selling, general and
Administrative expenses
- Third parties (14,473) ( 1,743) (17,968) (2,171)
- Related parties (1,517) (183) (704) (85)
-------- --------- --------- --------
(15,990) (1,926) (18,672) (2,256)
Interest expenses, net
- Third parties (11,765) (1,417) (14,599) (1,764)
- Related parties (4,141) (499) (497) (60)
-------- --------- --------- --------
(15,906) (1,916) (15,096) (1,824)
-------- --------- --------- --------
Operating loss before minority
interests (27,477) (3,310) (32,690) (3,948)
Minority interests 12,292 1,481 14,755 1,783
--------- --------- --------- --------
Net loss from continuing operations (15,185) (1,829) (17,935) (2,165)
Net profit/(loss) from discontinued
operations, net of income taxes (454) (55) 115 14
--------- --------- --------- --------
(15,639) (1,884) (17,820) (2,151)
======== ======== ======== ========
Loss per common share: 2
- Basic and diluted net loss from (1.08) (0.13) (1.27) (0.15)
continuing operations ========= ======== ======== ========
- Basic and diluted net loss (1.11) (0.13) (1.26) (0.15)
========= ========= ======== ========
- Basic 14,118,751 14,118,751 14,118,751 14,118,751
========== ========== ========== ==========
- Diluted 14,118,751 14,118,751 14,118,751 14,118,751
========== ========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
6
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------
1999 1999 2000 2000
RMB US$ RMB US$
------- -------- ------ --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (15,639) (1,884) (17,820) (2,151)
Adjustments to reconcile loss to net
cash used in operating activities
Minority interests (12,292) (1,481) (14,755) (1,783)
Share of net (profit)/loss from discontinued
operations, net of income taxes 454 55 (115) (14)
Depreciation 19,459 2,344 18,935 2,289
Loss on disposal of fixed assets - - 79 10
Changes in operating assets and liabilities:
Decrease/(increase) in assets:
Accounts receivables (55,508) (6,632) (54,587) (6,597)
Notes receivable 530 64 1,928 232
Inventories 28,125 3,389 23,727 2,867
Other receivables (9,744) (1,174) (2,070) (252)
Due from related companies 7,188 865 10,411 1,257
Increase/(decrease) in liabilities:
Accounts payable (27,653) (3,331) 715 87
Accrued liabilities and other payables 42,477 5,117 11,225 1,357
Income tax payable 14,607 1,759 21,357 2,582
Taxes other than income (1,735) (208) (1,846) (224)
------ ------ ------ ------
Net cash used in operating activities from
continuing operations (9,281) (1,117) (2,816) (340)
Cash flows from investing activities:
Advances to subsidiary proposed for
disposal (738) (90) (961) (116)
Additions to fixed assets (2,114) (254) (2,899) (350)
------ ------ ------ -----
Net cash used in investing activities (2,852) (344) (3,860) (466)
------ ------ ------ ------
Cash flow from financing activities:
Net increase/(decrease) in short term bank loans (1,856) (224) 1,000 121
Repayment of installment loan (1,219) (147) - -
Interest payable on installment loan - - 1,312 158
------ ------- ------ ------
Net cash used in (provided by) financing activities (3,075) (371) 2,312 279
------ ------- ------ ------
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net decrease in cash and cash equivalents (15,208) (1,832) (4,364) (527)
Translation differences - - 39 4
Cash and cash equivalents, at beginning of period 19,075 2,298 8,420 1,018
------ ------- ------ ------
Cash and cash equivalents, at end of period 3,867 466 4,095 495
===== ======= ====== ======
Non-cash transactions: 5,069 611 4,390 531
Financing lease arrangements ===== ======= ====== ======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
8
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
1. GENERAL
Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in the
design, manufacture and distribution of a broad range of bearing products.
The Company acquired 100% of the issued share capital of China Bearing
Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share
Exchange Agreement with Asean Capital Limited in exchange for 10,261,000 shares
of common stock. The transaction has been treated as a recapitalization of China
Bearing with China Bearing as the acquirer (reverse acquisition). The historical
financial statements prior to December 2, 1994 are those of China Bearing.
The Company owns, through various subsidiaries and joint venture interests,
a 51.43% indirect ownership in Harbin Bearing Company Limited ("Harbin
Bearing"), a joint stock limited company organized under the law of the PRC.
Harbin Bearing is located in Harbin, the PRC, and has been in business since
1950. Harbin Bearing manufactures a wide variety of bearings in the PRC for use
in commercial, industrial and aerospace applications that are sold primarily in
the PRC and certain western countries, including the United States.
Until April 28, 2000 the Company also owned Smith Acquisition Company, Inc.
d/b/a Southwest Products Company ("Southwest Products"), a bearing manufacturing
company located in Los Angeles County, California, that has been in business
since 1945. Southwest Products manufactures precision spherical bearings that
are sold primarily to the aerospace and commercial aviation industries. Its
major customers are located in the United States.
In January 1996, the Company acquired Southwest Products. As a result of
the acquisition of Southwest Products, the Committee on Foreign Investment in
the United States ("CFIUS"), an inter-agency committee of the United States
Government, began an investigation of the Company to determine if the ownership
of Southwest Products by the Company would pose any threat to the national
security interests of the United States. In December 1998, the Company
voluntarily agreed to divest Southwest Products and, pending such disposition,
placed its ownership interest in Southwest Products into an irrevocable trust.
An independent trustee acceptable to the U.S. Department of Defense was
appointed to oversee the operations of Southwest Products to ensure Southwest
Product's compliance with all U.S. laws and regulations and to work with the
Company's Board of Directors to actively pursue the sale of Southwest Products.
In light of the Company's decision to appoint a trustee pending the sale of
Southwest Products, the CFIUS investigation was terminated.
At the time of creation of the trust, all "foreign persons" within the
meaning of 31 C.F.R. (S)800.213 who were serving as officers and/or directors of
Southwest Products tendered their resignations. In
9
<PAGE>
addition, in order to further implement the separation of the Company and
Southwest Products, CFIUS required, as part of its agreement that William McKay
no longer serve as an officer and director of the Company. On May 6, 1999,
William McKay was removed as a director by the Company's majority shareholders
and as President and Chief Executive Officer of the Company by the Company's
board of directors. Gunter Gao was named as the replacement President and Chief
Executive Officer of the Company. Except under very limited circumstances, the
Company can not exercise any control or influence over the business or
management of Southwest Products and has no access to visit or obtain
information from Southwest Products without prior trustee approval.
The Company entered into a Stock Purchase Agreement with William McKay on
January 31, 2000. On March 24, 2000, Mr. Makay assigned his rights under the
Stock Purchase Agreement to Mckay, Brothers & Horany Acquisition Corp. Pursuant
to the Stock Purchase Agreement on April 28, 2000, the Company sold its entire
interest in Southwest Products to McKay, Brothers & Horany Acquisition Corp. for
cash consideration of US$3,500 and the release of debt obligations in the amount
of US$3,952 owed by Southwest Products to the Company. The sale of Southwest
Products results in net proceeds of US$3,335 (net of the professional fees
US$165) of which US$2,600 was paid to the holders of the convertible debentures
(the "Debenture Holders"). See ITEM 2, "LIQUIDITY AND CAPITAL RESOURCES". The
remaining proceeds US$735 has been retained by the Company as additional working
capital. Upon the sale of Southwest Products, the Company terminated the trust
arrangement with the independent trustee for Southwest Products.
10
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
1. GENERAL (continued)
Upon the completion of the sale of Southwest Products on April 28, 2000,
the Company is currently considering modification of its business strategy,
which may involve restructuring to reduce operating expenses, seeking an
alliance with a strategic partner, reorganizing the Company's operations and/or
divesting the Company's bearing manufacturing assets in China and diversifying
into other lines of business.
2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America. All material intercompany balances and transactions
were eliminated on consolidation.
The accompanying consolidated condensed financial statements are unaudited
but, in the opinion of the management of the Company, contain all adjustments
necessary to present fairly the financial position as at March 31, 2000, the
results of operations for the three months ended March 31, 1999 and 2000, and
the changes in cash flows for the three months ended March 31, 1999 and 2000
respectively. These adjustments are of a normal recurring nature.
The consolidated balance sheet as of December 31, 1999, is derived from the
Company's audited financial statements. Certain information and footnote
disclosures normally included in financial statements that have been prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although the management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading. For further information, please refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 as filed
with the Securities and Exchange Commission.
11
<PAGE>
In 1997, the Financial Accounting Standards Board issued Statement No.128,
"Earnings per share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for the three months ended
March 31, 1999 and 2000 have been presented and, where appropriate, restated to
conform to SFAS 128 requirements.
12
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
The exercise of outstanding warrants is not included as part of the
assumption in the calculation of diluted earnings per share as the share price
of the Company for the three months ended March 31, 1999 and 2000 was lower than
the exercise prices.
The diluted loss per share for the three months ended March 31, 2000 is the
same as the basic loss per share as there was an antidilution effect which
reduces the loss per share. The calculation which resulted in such an
antidilution was based on the assumptions that the conversion rights under the
Convertible Debentures had been fully exercised, at the adjusted exercise price
as stated in note 7, and the redemption of preferred shares, both on January 1,
1998.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2000.
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE
The RMB is not freely convertible into foreign currencies.
Effective from January 1, 1994, a single rate of exchange is quoted daily
by the People's Bank of China (the "Unified Exchange Rate"). However, the
unification of the exchange rates does not imply convertibility of RMB into US$
or other foreign currencies. All foreign exchange transactions continue to take
place either through the Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the People's Bank of China.
In preparing the consolidated financial statements, the financial
statements of the Company are measured using Renminbi ("RMB") as the functional
currency. All foreign currency transactions are translated into RMB using the
applicable floating rates of exchange quoted by the People's Bank of China
prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies have been translated into RMB using the
unified exchange rate prevailing at the balance sheet dates. The resulting
exchange gains or losses have been credited or charged to the statements of
income for the periods in which they occur.
13
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued)
For financial reporting purposes, translation of amounts from RMB into US$
for the convenience of the reader has been made at the exchange rate quoted by
the People's Bank of China on March 31, 2000 of US$ 1.00 = RMB 8.275. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rate on March 31, 2000 or at any other certain rate on
March 31, 2000.
4. INVENTORIES
Inventories consist of the following at December 31, 1999 and March 31,
2000:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
---------------------------- ---------------------------
RMB US$ RMB US$
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Raw materials 120,515 14,564 119,307 14,418
Work-in-progress 126,888 15,334 124,388 15,032
Finished goods 412,018 49,790 391,999 47,371
--------- --------- ---------- ---------
659,421 79,688 635,694 76,821
Less: Allowance for obsolescence (211,300) (25,535) (211,300) (25,535)
--------- --------- ---------- ---------
Inventories, net 448,121 54,153 424,394 51,286
========= ========= ========== =========
</TABLE>
14
<PAGE>
5. DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
-------------------------- ---------------------------
RMB US$ RMB US$
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cost of investment 28,288 3,418 28,288 3,418
Share of accumulated losses of the
unconsolidated subsidiary (33,834) (4,088) (33,758) (4,079)
---------- ---------- ---------- ----------
Net carrying value (5,546) (670) (5,470) (661)
Due from the unconsolidated subsidiary 31,739 3,835 32,739 3,956
---------- ---------- ---------- ----------
26,193 3,165 27,269 3,295
========== ========== ========== ==========
</TABLE>
15
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATIONS (continued)
As stated in Note 1, the Company appointed a U.S. citizen as the trustee of
the Company to manage Southwest Products, pursuant to a Voting Trust Agreement.
The Voting Trust Agreement also provides that the Trustee will not accept
direction from the Company and will not permit the Company to exercise any
control or influence over the business or management of Southwest Products. All
visits or requests for information to Southwest Products by the Company must be
submitted to the Trustee in advance and receive the Trustee's approval. In
addition, all "foreign persons" within the meaning of 31 C.F.R. (S)800.213
serving as officers and/or directors of Southwest Products tendered their
resignations pursuant to the terms of the Voting Trust Agreement.
The entering of the Stock Purchase Agreement by the Company for the sale of
Southwest Products gave rise to the disposal of a segment of a business in
accordance with the APB 30. The sale of Southwest Products was completed on
April 28, 2000. The segment that was held for disposal was all identified as the
net assets of Southwest Products. The net assets of Southwest Products at
December 31, 1999 and March 31, 2000 were as follows:
16
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATIONS (continued)
<TABLE>
<CAPTION>
December 31 March 31
-------------- --------------
1999 1999 2000 2000
RMB US$ RMB US$
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash and bank balances 1,248 151 199 24
Inventories 16,819 2,033 21,176 2,559
Accounts receivables 3,413 412 6,694 809
Prepayment, deposit and other receivables 199 24 49 6
------- ------- --------- -------
Current assets 21,679 2,620 28,118 3,398
Property, plant and equipment, net 11,849 1,432 11,362 1,373
Goodwill * - - - -
Long term investment 151 18 157 19
--------- -------- --------- --------
33,679 4,070 39,637 4,790
--------- -------- --------- --------
Accounts payable (2,225) (269) (4,113) (497)
Other payables (5,178) (626) (8,176) (988)
Taxes other than income (76) (10) - -
Due to holding company (31,739) (3,835) (32,818) (3,966)
--------- -------- --------- --------
Current liabilities (39,225) (4,740) (45,107) (5,451)
--------- -------- --------- --------
Net assets/(deficieny in assets) (5,546) (670) (5,470) (661)
========= ======== ========= ========
* Goodwill of Southwest Products comprised:
Cost 10,760 1,300 - -
Less : Amortization (832) (101) - -
Less : Write-off ( 9,928) ( 1,199) - -
--------- -------- --------- --------
- - - -
========= ======== ========= ========
</TABLE>
17
<PAGE>
6. SECURED PROMISSORY NOTE
A promissory note for US$ 5,000 (RMB 41,600) (the "Promissory Note") was
issued in 1995 to Asean Capital Limited ("Asean") in connection with the Share
Exchange Agreement and was secured by a continuing security interest in all of
the Company's right, title and interest in the outstanding capital stock of its
wholly-owned subsidiary China Bearing. The Promissory Note is denominated and
repayable in full in United States dollars, and bears interest at 8% per annum.
In connection with the issuance of Convertible Debentures described at Note
7, Asean agreed that for so long as any of the Convertible Debentures are
outstanding, no amounts are to be repaid on the Promissory Note unless there is
sufficient working capital and the repayment is made in accordance with the
following schedule:-
Payment Period Amount
-------------- ------
August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest
In accordance with this schedule, a principal payment of US$ 2,000 (RMB
16,700) was made on the Promissory Note on September 10, 1996. As a result of
the Company's current financial position, the directors do not expect to make
any other repayments in the foreseeable future.
7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN
Pursuant to a Subscription Agreement dated August 2, 1996, (the
"Subscription Agreement"), among China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and Chine
Investissement 2000 (collectively the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of US$ 11,500 principal amount of convertible
debentures (the "Convertible Debentures") to the Investors. Unless the
Convertible Debentures were converted, the Convertible Debentures are due and
payable in August, 1999 (the "Maturity Date").
The Convertible Debentures bear interest at the rate of the higher of (i)
5% per annum (net of withholding tax, if applicable) and (ii) the percentage of
the dividend yield calculated by reference to dividing the annual dividend
declared per share of Common Stock of the Company by the Conversion Price (as
hereinafter defined). Interest is payable quarterly.
18
<PAGE>
7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued)
The Investors have the right to convert at any time, in whole or in part of
the principal amount of the Convertible Debentures into shares of the Common
Stock of the Company. The Conversion Price (the "Conversion Price") was
initially US$5.00 per share, subject to adjustment for (a) change in par value
of the Common Stock, (b) issuance of shares by way of capitalization of profits
or reserves, (c) capital distributions, (d) rights offering at a price which is
less than the lower of the then market price or Conversion Price, (e) issuance
of derivative securities where the total consideration per share initially
received is less than the lower of the then market price or Conversion Price,
(f) issuance of shares at a price per share which is less than the lower of the
then market price or the Conversion Price, and (g) if the cumulative audited
earnings per common share for any two consecutive fiscal years commencing with
the fiscal year ended December 31, 1996 and ending with the fiscal year ending
December 31, 1998 are less than the specified projection of cumulative earnings
per common share for such periods. Due to the Company's failure to achieve the
projected cumulative audited earnings per common share of US $1.79 for the two
years ended December 31, 1997, the Conversion Price has been adjusted to US$1.84
per share pursuant to the terms of the Subscription Agreement.
The Convertible Debentures are required to be redeemed on the Maturity Date
at its principal amount outstanding, together with any accrued but unpaid
interest, together with an amount that would enable the Investors to yield an
aggregate internal rate of return ("IRR") of 12% per annum on the cost of their
investment.
However, due to the occurrence of certain events of default, as defined in
the Subscription Agreement in 1997, the Convertible Debentures shall
automatically become immediately due and payable in full by the Company at the
principal amount outstanding together with accrued but unpaid interest together
with an amount that would enable the Investors to yield an aggregate IRR on
their investment of 19.75% per annum. Events of default include the delisting of
the shares from NASDAQ or its suspension thereof; default in performance after
failure to cure after notice; failure to pay principal or interest; failure to
pay indebtedness for borrowed money bankruptcy, insolvency or unsatisfied
judgment; failure to achieve earning per common share of at least US$0.55 for
fiscal years commencing January 1, 1996; and accounts receivable reaching a
certain level in relation to net sales.
Due to the failure of the Company to achieve the required minimum earnings
per common share of US$0.55 in 1997, an event of default occurred. As a result,
interest was being accrued at the rate of 19.75% per annum. Pursuant to a
Settlement Agreement reached in October 16, 1998 with the Debenture Holders, the
Debenture Holders agreed not to demand the immediate repayment of the
Convertible Debentures. In addition, the aggregate principal amount of the
Convertible Debentures (plus simple interest at a rate of 12.375% per annum
until July 22, 1998 less interest paid) was restructured as a Installment Loan
in an aggregate principal amount of US $13,173. The debt, which carries a simple
interest rate of 10% per annum, is required to be repaid over a period of three
years ending on July 23, 2001. As part of the settlement, the Company also
issued 466,667 shares of Common Stock to the Debenture Holders, which are not
transferable for a period of three years. The members of the Sunbase Group
agreed that 50% of any public market funds raised by the Company or its
subsidiaries will be applied immediately towards discharging the then
outstanding debt and interest accrued thereon.
19
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued)
The obligations of China Bearing under the Settlement Agreement are
guaranteed by other members of the Sunbase Group on an at least pari passu basis
with the guarantors' other present and future unsecured and unsubordinated
obligations.
This modification of terms of the debts thus constitutes troubled debt
restructuring under Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("FAS
15"). Under FAS 15, a debtor shall account for a troubled debt restructuring,
when there is modification of terms of the debts, at the carrying amount of the
payable at the time of the restructuring unless the carrying amount exceeds the
total future cash payments specified by the new terms.
The principal balance of the Installment Loan was restated to the face
value together with any unpaid interest expenses calculated at the rate of
19.75% as entitled in the Subscription Agreement, after adjusting the fair value
of the common stocks issuable on debt restructuring. The fair value of the
common stocks issuable on debt restructuring was RMB 2,905, being the market
value of the Company's trading stocks at October 16, 1998. Thereafter, the
interest expenses of the Installment Loan was charged to the profit and loss
account on a discounted basis.
The Installment Loan bears an effective interest of 5.6% per annum and is
repayable with a repayment schedule as set out in the Settlement Agreement.
Pursuant to an undertaking as a supplement to the Settlement Agreement,
Asean Capital unconditionally and irrevocably guarantees and undertakes to each
of the Debenture Holders that for so long as any of the obligations of the
Company under the Settlement Agreement remain outstanding the full due and
punctual payment of all sums now or subsequently payable under the Settlement
Agreement by China Bearing and agrees to perform or procure the performance of
such payment obligations of China Bearing. Pursuant to the Settlement Agreement,
the holding company of Asean Capital, Sunbase International Holdings Limited
("Sunbase International") undertakes to each of the Debenture Holders that
Sunbase International shall not reduce its current issued beneficial
shareholdings (being 100%) in the share capital of Asean Capital. In addition,
one of the subsidiaries of Sunbase International, Extensive Resources Limited
("ERL") further granted a charge over 1,000,000 issued shares in the capital of
Tianjing Development Holdings Limited held by ERL in favour of the trustee for
and on behalf of the Debenture Holders. Tianjing Development Holdings Limited is
a company listed in the Hong Kong Stock Exchange. The market value of the
pledged shares was RMB3,650 at March 31, 2000.
The maturity of the Installment Loan was as follows:
RMB
Payable in period ending
- March 31, 2000 30,260
- March 31, 2001 35,938
- July 23, 2001 49,599
-------
115,797
=======
20
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Amounts in thousands, except number of shares and per share data)
7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued)
Since March 1999, default in repayment has been noted and, in accordance
with the Settlement Agreement, the creditors of the Installment Loan are
entitled to accelerate repayment of the principal amount outstanding together
with the unpaid interest. Accordingly, the unpaid balance of the Installment
Loan was classified as a current liability as at March 31, 2000.
On March 1, 2000, the same parties of the Settlement Agreement further
entered into a supplemental agreement (the "Supplemental Agreement") stating
that (i) the Company shall, upon the receipt of the proceeds from the sale of
Southwest Products pursuant to the Stock Purchase Agreement as mentioned in
above, repay US$2,600 for the partial settlement of the overdue portion of the
Installment Loan; (ii) the creditors requested that the remaining portion of the
overdue installments shall be immediately due but agreed not to demand immediate
settlement of the undue portion which shall remain at the original repayment
schedule, as set out in the Settlement Agreement; (iii) one of the guarantors,
ERL agreed to grant a new charge on certain pledged listed shares, as mentioned
above, in favor of the trustee of the Debenture Holders; and (iv) the guarantee
from Southwest Products shall be released upon the settlement of US$2,600, as
mentioned above.
On April 28, 2000, the sale of Southwest Products was completed. A payment
of US$2,600 was made for the partial settlement of the overdue portion of the
Installment Loan and the guarantee from Southwest Products was released by the
creditors.
21
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
OVERVIEW
The Company continued to face difficulties in the first quarter of 2000
brought forward from the fourth quarter of 1999. Among these difficulties are
the continued declining demand for bearings in the PRC, the inability to
recovering debts due from state owned enterprises customers, severe competitions
in the bearing industry and continuing excessive production capacity in the
industry. The aforesaid factors collectively contributed to the persisting
adverse financial results in the first quarter of 2000. However, we can, when
comparing with the fourth quarter of 1999 and the first quarter of 2000 noted
slight improvement. This slight improvement was mainly caused by the general
economic improvement in the PRC. For instance, the deflation situation has
improved from 3% in 1999 to 2.1% in the first quarter of 2000. We hope that the
situation will continue to improve with the government's stimulation policies on
the economy in the past eighteen months to take effect.
The sale of Southwest Products was completed on April 28, 2000. As the
Company retained a share of Southwest's net assets amounting to
RMB27,269(US$3,295) in 2000, which did not exceed the net proceeds of US$3,335,
consequently no anticipated loss on sale of Southwest Products was noted. The
Company had not attracted any capital gain tax liability as a result of the sale
of Southwest Products. See Note 5 to the Company's 2000 consolidated condensed
financial statements.
Unless otherwise indicated in this Item 2, all RMB and U.S. Dollar amounts
except per share information are expressed in thousands ('000).
RESULTS OF OPERATION
The following table sets forth certain unaudited operating data (in RMB and
as a percentage of the Company's sales) for the three months ended March 31,
1999 and 2000.
22
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1999 2000
---- -----
RMB % RMB %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Net sales 113,340 100 148,498 100
Cost of sales (108,921) ( 96.1) (147,420) (99.3)
--------- ------- --------- ------
Gross profit 4,419 3.9 1,078 0.7
Selling expenses (5,880) (5.2) (5,836) (3.9)
General and administrative expenses (10,110) (8.9) (12,836) (8.7)
Interest expenses (15,906) (14.0) (15,096) (10.1)
--------- ------- --------- ------
Operating loss before minority interests (27,477) (24.2) (32,690) (22.0)
Minority interests 12,292 10.8 14,755 9.9
--------- ------- --------- ------
Net loss from continuing operations (15,185) (13.4) (17,935) (12.1)
Net (profit)/loss from discontinued
operations (454) (0.4) 115 0.1
--------- ------- --------- ------
(15,639) (13.8) (17,820) (12.0)
========= ======= ========= ======
</TABLE>
23
<PAGE>
Net Sales
- ---------
Net sales for the Company from continuing operations for the three months
ended March 31, 2000 increased by RMB 35,158 or 31% to RMB 148,498, as compared
to RMB 113,340 for the three months ended March 31, 1999. The increase in net
sales for the three months ended March 31, 2000 was due to the increase in the
sale of existing inventories, which in turn has enhanced the liquidity position
of the Company.
Cost of Sales/Gross Profit
- --------------------------
Cost of sales for the Company from continuing operations for the three
months ended March 31, 2000 increased by RMB 38,499 or 35.3% to RMB 147,420 as
compared to RMB 108,921 for the three months ended March 31, 1999. The cost of
sales for the three months ended March 31, 2000 and 1999 was calculated using
the gross profit method by reference to average annual gross profit ratios.
The Company's gross profit from continuing operations for the three months
ended March 31, 2000 decreased by RMB 3,341 or 75.6% to RMB 1,078 as compared to
RMB 4,419 for the three months ended March 31, 1999. Gross profit as a
percentage of revenue also decreased from 3.9% for the three months ended March
31, 1999 to 0.7% for three months ended March 31, 2000. This reduction in gross
profit was attributable to the Company's continuing acceptance of some very
low-priced orders in order to maintain its production to cover some of its fixed
cost as well as to maintain its market share.
Selling Expenses
- ----------------
Selling expenses for the Company from continuing operations for the three
months ended March 31, 2000 was RMB5,836 as compared to RMB5,880 for the three
months ended March 31, 1999, a slight decrease of 1.3% as a percentage to net
sales. Selling expenses as a percentage of net sales decreased to 3.9% as
compared to 5.2% for the three months ended March 31, 1999. This improvement
was caused by the adoption of certain cost-cutting measures since the fourth
quarter of 1999 and shall continue in 2000.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for the Company from continuing
operations for the three months ended March 31, 2000 increased by RMB 2,726 or
26.9% to RMB 12,836 as compared to RMB 10,110 for the three months ended March
31, 1999. The increase was mainly caused by the
24
<PAGE>
increase in travelling expenses relating to the Company's continued effort
in recovering accounts receivable due from its customers and finding and
developing new customers and markets.
Interest Expenses
- -----------------
Interest expenses for the Company from continuing operations for the three
months ended March 31, 2000 remained essentially unchanged from 1999.
Net loss from continuing operations
- -----------------------------------
As a result of the aforementioned factors, net loss from continuing
operations increased by RMB 2,750 or 18.1% to RMB 17,935 for the three months
ended March 31, 2000 as compared to RMB 15,185 for the three months ended March
31, 1999.
Net profit from discontinued operations
- ---------------------------------------
The Company's recorded net profit from discontinued operations of RMB 115
for the three months ended March 31, 2000 as compared to net loss of RMB 454 for
the three months ended March 31, 1999. This improvement resulted primarily from
increased sales for the period.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
Net cash used in operating activities from continuing operations was RMB
2,816 for the three months ended March 31, 2000, as compared to RMB 9,281 for
the three months ended March 31, 1999. The decrease in use of cash in operating
activities from continuing operations is primarily due to the increase in income
tax payable and decrease in due from related companies.
The Company's negative working capital was RMB388,870 at March 31, 2000 as
compared to RMB 371,373 at December 31, 1999, and working capital of RMB 45,500
at March 31, 1999 and the Company's current ratio at March 31, 2000 was 0.74:1
as compared to 0.74:1 at December 31, 1999 and 1.04:1 at March 31, 1999.
Investing activities
Capital expenditure for the three months ended March 31, 2000 of RMB 2,899
consisted of cost relating to the renovation of existing facilities and
equipment, and were financed by internally generated funds, short-term and long
term bank loans. The Company does not expect to spend more than the minimum
required to maintain its equipment and facilities in 2000. As of March 31,
2000, the Company had no outstanding capital expenditure commitments. There were
no other material capital expenditures expected in the near future.
Financing activities
The Company has historically relied on both short-term and long-term bank
loans from Chinese banks to support its operating requirements. Short-term bank
loans, which have terms ranging from three months to six months, are utilized to
finance operating requirements and capital requirements and are renewed on a
revolving basis. Long-term bank loans are utilized to fund capital expansion
projects. During the three months ended March 31, 2000, the net increase in bank
loans (after deducting repayment) was RMB 1,000. The Company believes that it
will be able to continue to maintain and expand its bank borrowings under its
current lending arrangements.
After the completion of the sale of Southwest Products and the execution of
the Supplemental Agreement referred to below, the Company has retained US$735 of
the proceeds as additional working capital. There can be no assurance that the
Company's business will generate cash flow that, together with additional
financing, to the extent available, will be sufficient to allow the Company to
meet its requirements for working capital and debt payments.
26
<PAGE>
In August 1996, China Bearings issued U.S.$11.5 million aggregate principal
amount of the Convertible Debentures to three investors. The Convertible
Debentures were convertible, at the option of the Debenture Holders in whole or
in part, at any time into shares of Common Stock of the Company. The Conversion
Price was initially US$5.00 per share, subject to adjustment for (a) a change in
par value of the Common Stock, (b) the issuance of shares by way of
capitalization of profits or reserves, (c) capital distributions, (d) a rights
offering at a price which is less than the lower of the then market price of the
Common Stock or the Conversion Price, (e) the issuance of derivative securities
where the total consideration per share initially received is less than the
lower of the then market price of the Common Stock or the Conversion Price, (f)
the issuance of shares at a price per share which is less than the lower of the
then market price of the Common Stock or the Conversion Price and (g) if the
cumulative audited earnings per common share for any two consecutive fiscal
years commencing with the fiscal year ended December 31, 1996 and ending with
the fiscal year ending December 31, 1998 are less than the specified projection
of cumulative earnings per common share for such period. Due to the Company's
failure to achieve the projected cumulative audited earnings per common share of
US$1.79 for the two years ended December 31, 1997, the Conversion Price was
adjusted to US$1.84 per share pursuant to the terms of the Subscription
Agreement.
Unless earlier converted, the Convertible Debentures matured in August
1999. Interest accrued at a rate equal to the higher of (i) 5% per annum (net of
withholding tax, if applicable) and (ii) the percentage of the dividend yield
calculated by dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price. Interest on the Convertible Debentures was
payable quarterly.
At maturity, the Convertible Debentures were required to be redeemed at a
redemption price equal to the principal amount then outstanding plus any accrued
but unpaid interest, together with an amount sufficient to enable the Debenture
Holders to receive an aggregate IRR of 12% per annum on the cost of their
investment. In addition, if any of the events of default specified in the
Subscription Agreement occurred, the Convertible Debentures become automatically
due and payable at the principal amount outstanding together with accrued and
unpaid interest and an amount that would enable the Debenture Holders to yield
an aggregate IRR on their investment of 19.75% per annum. Events of default
included breach of covenants after failure to cure after notice, failure to pay
principal or interest, failure to pay indebtedness for borrowed money, certain
events of bankruptcy or insolvency, judgement defaults, failure to achieve
earnings per common share of at least US $0.55 for each fiscal year commencing
January 1, 1996, accounts receivable reaching a certain level in relationship to
net sales and delisting or suspension of trading of the Company's Common Stock
from Nasdaq.
Due to the failure of the Company to achieve the required minimum earnings
per common share of US$0.55 in 1997, an event of default occurred. As a result,
interest accrued at the default rate of 19.75% per annum. Pursuant to a
Settlement Agreement reached in October 1998 with the Investors, the Investors
agreed not to demand the immediate repayment of the Convertible Debentures. In
addition, the aggregate principal amount of the Convertible Debentures (plus
simple interest at a rate of 12.375% per annum until July 22, 1998 less interest
paid) was
27
<PAGE>
restructured as a Installment Loan in an aggregate principal amount of
US$13,173. The debt, which carries a simple interest rate of 10% per annum, is
required to be repaid over a period of three years ending on July 23, 2001. As
part of the settlement, the Company also issued 466,667 shares of Common Stock
to the Investors, which are not transferable for a period of three years. The
members of the Sunbase Group agreed that 50% of any public market funds raised
by the Company or its subsidiaries would be applied immediately towards
discharging the then outstanding debt and interest accrued thereon.
The obligations of China Bearing under the Settlement Agreement are
guaranteed by other members of the Sunbase Group on an at least pari passu basis
with the guarantors' other present and future unsecured and unsubordinated
obligations.
On March 1, 2000, the Company entered into the Settlement Agreement with
the creditors. Pursuant to the Supplemental Agreement, the Company promised,
upon the receipt of the consideration from the sale of Southwest Products, to
pay US$2,600 as partial settlement of the overdue portion of the Installment
Loan and the creditors agreed that the remaining undue portion of the
Convertible Debentures is repayable on the schedule originally set out in the
Settlement Agreement.
China Bearing has failed to make the scheduled monthly payments under the
Settlement Agreement since March 23, 1999. The total amount of principal and
interest due as of March 31, 2000 are $3,657 and $733 respectively. Upon the
completion of Southwest Product's sale on April 28, 2000, a payment of $2,600
was made as partial settlement of outstanding debt under the Settlement
Agreement. After the payment, the total amount of principal and interest past
due as of April 23, 2000 are $1,402 and $198 respectively. Thus, the Company,
China Bearing and the other members of the Sunbase International will continue
to seek further equitable resolution with the Debenture Holders regarding these
amounts. While the Company believes that a workable solution can be reached with
the Debenture Holders in due course, no assurance can be given as to when or if
such negotiations will result in a resolution that is favorable to the Company.
In connection with the acquisition by the Company of its interest in Harbin
Bearing from Asean Capital, in addition to shares of Common Stock issued by the
Company to Asean Capital, the Company issued a promissory note for US $5,000
(RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a
continuing security interest in all of the Company's right, title and interest
in the outstanding capital stock of its wholly-owned subsidiary, China Bearing.
The Promissory Note is denominated and repayable in full in US dollars, and
bears interest at a rate of 8% per annum. In connection with the issuance of the
Convertible Debentures, Asean Capital agreed that for so long as any of the
Convertible Debentures are outstanding, no amounts may be repaid by the Company
on the Promissory Note unless there is sufficient working capital and the
repayment is made in accordance with the following schedule:
28
<PAGE>
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to US$2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$1,500 plus accrued interest
In accordance with this schedule, a principal payment of US$2,000 (RMB
16,700) was made in September 1996. As a result of the Company's current
financial position, the directors do not expect to make any other repayments in
the foreseeable future.
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
contained in this Quarterly Report, however, have been prepared on a going
concern basis. They do not include any adjustments that might result from the
outcome of the uncertainty relating to the Company's ability to continue as a
going concern, including, without limitation, adjustments to the carrying value
of assets and liabilities or the classification of liabilities that would be
necessary if the Company were not considered to be a going concern. Such
adjustments would have a material adverse effect on the Company's financing
condition.
See Note 2 to the Company's 1999 consolidated financial statements for a
description of the company's plans to maintain liquidity and obtain financing.
INFLATION / DEFLATION AND CURRENCY MATTERS
In recent years, the Chinese economy has experienced periods of rapid
economic growth and high rates of inflation, which have from time to time, led
to the adoption by the Chinese government of various corrective measures
designed to regulate growth and control inflation. Since 1998, the general
inflation rate in the PRC was under control, with the PRC experiencing a 2.1%
deflation in prices for the three months ended March 31, 2000 (1999: minus
3.0%). Since 1993, the Chinese government has implemented and maintained an
economic program designed to control inflation, which has resulted in the
tightening of working capital available to Chinese business enterprises. The
success of the Company depends in substantial part on the continued growth and
development of the Chinese economy.
The Company continually monitors the effects of inflation and deflation. In
view of the change in market conditions and increased competition, the Company
in an inflationary market may be unable to raise its prices to shift a portion
of the inflated costs to customers, and the Company in a deflationary market may
be forced to lower its prices to maintain competitive prices. The price of
bearing steel, the major raw material used by the Company, remained fairly
stable during, 1998, 1999 and the first quarter of 2000.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies.
29
<PAGE>
Changes in the relative value of currencies occur periodically and may, in
certain instances, materially affect the Company's results of operations.
Although the Company has export ambitions, historically, substantially all
of the Company's sales from businesses that it continues to own and operate have
been domestic and settled in RMB. Moreover, historically, substantially all of
the Company's costs from businesses that it continues to own and operate have
been incurred in RMB. It is possible, however, that the revenue/cost profile of
the Company could change in the future, and if it does, then it is possible that
a devaluation of the RMB against the US Dollar could have a material adverse
effect upon the results of operations. Currently, all of the Company's bank
debts are denominated in RMB. However, the Company has indebtedness in respect
of the Convertible Debentures that is denominated in US dollars, so that a
devaluation of the RMB against the US Dollar could have a material adverse
effect upon the Company's financial position. Although prior to 1994 the RMB
experienced significant devaluation against the US Dollar, the RMB has remained
fairly stable from 1994 to present. The unified exchange rate was US$1.00 to RMB
8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.3 at December 31,
1997, RMB 8.3 at December 31, 1998, RMB 8.275 at December 31, 1999 and RMB 8.275
at March 31, 2000. The People's Bank of China has declared its intention not to
devalue the RMB. However, it is possible that competitive pressures resulting
from the significant devaluation of other Asian currencies will ultimately force
the Government of China to reconsider its position on devaluation of the RMB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Nasdaq De-Listing
In February 1999, the Company's Common Stock was delisted from Nasdaq.
After its delisting from Nasdaq, the Common Stock traded on the Bulletin Board.
Between May 20, 1999 and October 26, 1999 the Company's Common Stock did not
trade on the Bulletin Board because there were no market makers making a market
in the Common Stock and the Company was not current with its public information
requirements.
Potential Acceleration of Amounts due under the Settlement Agreement
As a result of the failure by China Bearing to make scheduled monthly
payments due under the installment provisions of the Settlement Agreement, the
Debenture Holders have the right to accelerate the payment of all amounts due
under the Settlement Agreement, as well as the right to exercise all other
remedies available to them under the subscription agreement pursuant to which
the Convertible Debentures were purchased. While the Company believes that an
equitable resolution may be reached with the Debenture Holders of this
indebtedness no assurances can be given in this regard and any acceleration
would have a severe negative effect on the liquidity of the Company.
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
30
<PAGE>
As at March 31, 2000, the Company has, on a consolidated basis, total
indebtedness of approximately RMB 866,837 (US$ 104,754), resulting in a ratio of
debt to total capitalization of 671:1 at that date. Substantially all of such
indebtedness is denominated in RMB.
The Company will require substantial cash flow to meet its repayment
obligations on its indebtedness, as well as on any future additional
indebtedness it may incur. In the first quarter of 2000, the Company's earnings
were inadequate to cover fixed charges by approximately RMB 133,617 (US $16,147)
(Note: For purposes of this calculation, the term "fixed charges" means the
total amount of debt service (principal and interest) due under the Convertible
Debentures, as modified by the Settlement Agreement, during the first quarter of
2000. The Promissory Note issued to Asean Capital did not appear to be
meaningful for purposes of this calculation because the Promissory Note is
subordinated to the Convertible Debentures and was issued to a related party.
(The term "earnings" means net loss from continued operations during the first
quarter of 2000. Thus, for this calculation, the first quarter of 2000 net loss
was simply added to the first quarter of 2000 debt service under the Convertible
Debentures, as modified by the Settlement Agreement.)
The ability of the Company to make scheduled interest payments on, and
retire at maturity the principal of, its indebtedness is dependent on the
Company's future performance. However, the Company experienced net loss from
continuing operations and negative cash flow from continuing operations of RMB
9,784 and RMB 2,816 for the period ended March 31, 2000, and RMB 15,185 and RMB
9,281 for the period ended March 31, 1999, respectively. The Company expects
that net losses may continue for the foreseeable future in view of the current
economic situation in China and many other factors beyond its control. In
addition, the Convertible Debentures and the Settlement Agreement impose
significant operating and financial restrictions on the Company. Such
restrictions limit the Company's ability to create liens and its use of the
proceeds from certain asset sales. These factors may make the Company more
vulnerable to economic and industry downturns, limit its ability to obtain
additional financing to fund future working capital requirements, capital
expenditures or other general corporate purposes, and reduce its flexibility in
responding to changing business or economic conditions or to a substantial
decline in operating results.
The Company may require substantial additional funds in the event it fails
to meet its projected operating results or its needs exceed its projected
capital requirements. The Company's future sources of financing may include
equity and debt financing. Accordingly, the Company may be required to refinance
a substantial portion of its indebtedness since cash flow from operations may be
inadequate to meet payment obligations arising from its long-term indebtedness.
There can be no assurance that the Company will be able to raise necessary debt
and/or equity proceeds to meet these debt obligations or that the Company will
have requisite access to capital markets on acceptable terms.
Ability of the Company to Continue as a Going Concern
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition
31
<PAGE>
and results of operations of the Company set forth herein, and in the Company's
financial statements included herein, however, have been prepared on a going
concern basis. They do not include any adjustments that might result from the
outcome of the uncertainty relating to the Company's ability to continue as a
going concern, including, without limitation, adjustments to the carrying value
of assets and liabilities or the classification of liabilities that would be
necessary if the Company were not considered to be a going concern. Such
adjustments would have a material adverse effect on the Company's reported
financial condition.
Potential Changes in the Economy of China
The economy of the PRC has experienced significant growth in the past
decade. Much of this growth has been a result of governmental policies which
have encouraged substantial private economic activity. The continuation of
growth in China is now subject to a number of uncertainties including, without
limitation, a continuation of governmental policies favoring private enterprise,
continued success in maintaining a moderate rate of inflation, the ability of
China to remain competitive with other Asian countries that have experienced
significant devaluation of their currencies during the past two years,
resolution of liquidity problems affecting the Chinese banking system and
economy as a whole and the maintenance of uninterrupted trading relationships
with the United States and other major trading partners. In the event that
negative developments in these or other areas result in a slowdown or decline in
the economy of China, it is likely that the future results of operations of the
Company will be adversely effected.
Political and Regulatory Considerations in China
Although the government of China has been pursuing economic reform policies
for over a decade, there can be no assurances that such policies will continue.
Any change in such policies could have a substantial adverse effect on the
economic growth of China which would likely diminish the market for the
Company's products in China. Moreover, changes in the laws or regulations
governing business operations, restrictions on foreign ownership of Chinese
companies, exchange controls, changes in the tax laws or restrictions on the
repatriation of profits could be imposed in a manner which would result in
negative consequences to the Company and its interest in Harbin.
Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality
Standards; Ability to Remain Competitive with Multinational Manufacturers.
To date Harbin Bearing has been unable to establish procedures that would
enable it to qualify to international quality standards, generally accepted
automotive quality standards or aerospace quality standards. Such failure has
resulted in Harbin Bearing's inability to capture orders from the U.S.
automotive and aerospace industries. The international bearing industry is
extremely competitive. Although the Company's main competitors are Eastern
European manufacturers and manufacturers located in China, to a lesser extent,
the Company also competes with companies such as Svenska Kugellager Fabriken,
Fisher Aktien Gesellschast, New Technology Network, NSK, Timken,
Torrington-Fafnir and Nippon Miniature Bearing, who dominate this market. The
Company had hoped that its acquisition of Southwest Products would not only
allow it to access
32
<PAGE>
the U.S. bearing market, but also allow it to implement U.S. manufacturing
methods and quality control procedures at Harbin Bearing to develop new products
and meet the stringent requirements of many non-PRC OEMs. By doing so, the
Company expected to increase its penetration of the international bearing
market. As a result of the Company's decision to dispose of Southwest Products
in response to the CFIUS investigation, however, the Company has suspended
indefinitely its plan to enable Harbin Bearing to meet these international
standards. Failure to qualify Harbin Bearing to these standards is expected to
constrain the Company's future growth.
The Company's products may become obsolete as a result of new technologies
or new developments affecting the bearing industry. The Company's ability to
remain competitive depends in significant part on its ability to anticipate and
stay abreast of new technological developments, fund research and development,
introduce new products and retain key personnel for these functions. Some of the
Company's competitors have substantially greater resources available for these
purposes. To the extent that the Company does not generate adequate cash flow or
obtain other financing to fund product development, the Company's competitive,
including by positioning will probably be adversely effected, which may result
in a loss of sales or lower productivity.
Impact of the Turmoil in Asian Markets
The turmoil in Asian markets may affect the political and economic policies
in China and the continued deterioration of the Asian market coupled with the
liquidity restraints imposed in China could adversely affect the Company's
operations and the collectability of its accounts receivable. Continuation of
these trends could also impair the Company's liquidity.
33
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities. Currently, the
Company is unable to hedge its RMB-hard currency exchange risks due to
restrictions imposed by the government of the PRC which prevent financial
institutions to engage in foreign currency transactions offering forward
exchange contracts with respect to the RMB.
Foreign Currency Risk
Although the Company has export ambitions, historically, substantially all
of the Company's sales from businesses that it continues to own and operate have
been domestic and settled in RMB. Moreover, historically, substantially all of
the Company's costs from businesses that it continues to own and operate have
been incurred in RMB. Thus, the functional currency of Harbin Bearing and the
Company's other PRC subsidiaries is the RMB. It is possible, however, that the
revenue/cost profile of the Company could change in the future, and if it does,
then it is possible that a devaluation of the RMB against the US Dollar could
have a material adverse effect upon the results of operations.
Currently, all of the Company's bank debts are denominated in RMB. However,
the Company has indebtedness under the Settlement Agreement (and under the
Convertible Debentures and Subscription Agreement in the event a satisfactory
settlement can not be made pursuant to default under the Settlement Agreement)
that is denominated in US dollars, so that a devaluation of the RMB against the
US Dollar could have a material adverse effect upon the Company's financial
position.
As a result of the foregoing factors, the Company is subject to risk from
fluctuations in the value of the RMB relative to the US dollar.
The RMB is translated into U.S. dollars in consolidation, and will result
in cumulative translation adjustments which are included in other comprehensive
income (loss). For the first quarter of 2000, the potential effect on other
comprehensive income (loss) resulting from a hypothetical 5%, 10% and 20%
weakening in the quoted RMB rate against the U.S. dollar would have resulted in
a $7, $14 and $26 decrease in consolidated stockholders' equity and a $103, $196
and $359 decrease in net loss as of March 31, 2000. The same hypothetical
movements would have resulted in an RMB 5,790, RMB 11,580 and RMB 23,159
increase in the amount of debt service payable by the Company under the
Settlement Agreement in the first quarter of 2000. Actual results may differ.
Interest Rate Risk
The Company's bank loans are all fixed rate and denominated in RMB. Fixed
rates range between 6.435% per annum and 9.24% per annum for short-term loans,
and between 3.7% per
34
<PAGE>
annum and 15.12% per annum for long-term loans. The total amount of short-term
bank loans outstanding as of March 31, 2000 was RMB 576,652 with an effective
interest rate of 8.085% per annum. The total amount of long-term bank loans
outstanding as of March 31, 2000 was RMB 168,974, with an effective interest
rate of 8.4% per annum. In addition, the Company has indebtedness of RMB 115,797
and accrued interest payable of RMB4,102 under the Settlement Agreement (and
under the Convertible Debentures and Subscription Agreement in the event a
satisfactory settlement can not be made pursuant to default under the Settlement
Agreement) at fixed rates of interest. As such, the Company is exposed to
interest rate risk on its long-term bank loans and in respect of its
indebtedness under the Settlement Agreement (or Convertible Debentures and
Subscription Agreement). Given banking practices in the PRC, the Company
believes that it will be able to refinance its long-term bank loans at market
rates whenever they drop significantly below the fixed rates specified on its
long-term bank loans. At present, the Company believes that the risk of a
significant drop in relevant market interest rates during the term of the debt
under the Settlement Agreement is remote; however, the Company may consider
entering into hedge transactions if such a risk is perceived to increase.
35
<PAGE>
Item 1 Legal Proceedings
There are no material developments.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
China Bearing has failed to make the scheduled monthly
payments under the Settlement Agreement since March 23, 1999. The
total amount of principal and interest due as of March 31, 2000 and
US$3,657 and US$733 respectively. Upon the completion of Southwest
Products' sale on April 28, 2000, a payment of US$2,600 was made as
partial settlement of outstanding debt under the Settlement
Agreement. After the payment, the total amount of principal and
interest past due as of April 23, 2000 are US$1,402 and US$198
respectively. Thus, the Company, China Bearing and the other
members of the Sunbase International will continue to seek further
equitable resolution with the Debenture Holders regarding these
amounts. While the company believes that a workable solution can be
reached with Debenture Holders in due course, no assurance can be
given as to when or if such negotiations will result in a
resolution that is favorable to the Company.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings per common share
27 Financial Data Schedule
(b) Reports on Form 8-K:
Three months ended March 31, 2000: None
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNBASE ASIA INC.
----------------------------
(Registrant)
Date: May 24, 2000 By: /s/ Gunter Gao
------------------------
Gunter Gao
Chairman, President and
Chief Executive Officer
Date: May 24, 2000 By: /s/ (Roger) Li Yuen Fai
----------------------------
(Roger) Li Yuen Fai
Vice President and
Chief Financial Officer
(Principal Financial Officer)
37
<PAGE>
EXHIBIT 11
----------
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1999 2000 2000
RMB US$ RMB US$
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net loss from continuing operations (15,185) (1,829) (17,935) (2,165)
Net (Profit)/Loss from discontinued
operations, net of income taxes ( 454) ( 55) 115 14
---------- ---------- ---------- ----------
(15,639) (1,884) (17,820) (2,151)
========== ========== ========== ==========
Weighted average number of shares of
Common stock outstanding:
Shares of common stock outstanding 14,118,751 14,118,751 14,118,751 14,118,751
========== ========== ========== ==========
Loss per common share:
Basic and diluted loss from
continuing operations (1.08) (0.13) (1.27) (0.15)
========== ========== ========== ==========
Basic and diluted net loss (1.11) (0.13) (1.26) (0.15)
========== ========== ========== ==========
</TABLE>
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<S> <C> <C> <C> <C>
Weighted average number of shares of
Common stock outstanding:
Shares of common stock outstanding 14,118,751 14,118,751 14,118,751 14,118,751
Shares of common stock issuable
Assuming conversion of the
Convertible Preferred Stock
- Series A - - - -
- Series B - - - -
Shares of common issuable
assuming conversion of the
convertible debentures on
August 23, 1996 - - - -
---------- ---------- ---------- ----------
Total weighted average number of
shares of common stock and
common stock equivalents
outstanding 14,118,751 14,118,751 14,118,751 14,118,751
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 2000,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 495
<SECURITIES> 0
<RECEIVABLES> 79,189
<ALLOWANCES> 0
<INVENTORY> 51,286
<CURRENT-ASSETS> 129,835
<PP&E> 56,864
<DEPRECIATION> 18,935
<TOTAL-ASSETS> 189,994
<CURRENT-LIABILITIES> 176,828
<BONDS> 0
0
5,381
<COMMON> 14
<OTHER-SE> (5,239)
<TOTAL-LIABILITY-AND-EQUITY> 189,994
<SALES> 17,945
<TOTAL-REVENUES> 17,945
<CGS> 17,813
<TOTAL-COSTS> 17,813
<OTHER-EXPENSES> 2,256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,824
<INCOME-PRETAX> (3,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,165)
<DISCONTINUED> 14
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,151)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
